Finance 101 for Young Professionals (+ tips for parents!) | Guest: Ann Garcia, CFP and Author

Your credit score is your adult GPA!
In part two of my conversation with Ann Garcia, Certified Financial Planner, we focus on helping young professionals understand some simple ways to set themselves up for financial success.  Ann shares many easy steps to make the most out of the money you're making today while also beginning to build a safety net for the many expenses at different stages of our lives. 

Topics covered include understanding your credit score, managing credit cards, taking advantage of 401K and other investments, setting a budget, and more!

This is a quick hit of info - about 15 minutes of amazing and useful tips and advice!

Show notes:
I Will Teach You To Be Rich (Ramit Sethi) - Book on personal finance for 20-35 year olds
Round up your purchases for easy saving: Acorn's Investing
 XYPN - Fee-only financial planning and advice
Ann Garcia's book How to Pay for College: A complete financial plan for funding your child's education

LAUNCH Career Strategies was founded by Karen Elders and Elyse Spalding. We help young professionals launch a successful career path with expert coaching services. Reach out today for an initial FREE coaching session.
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Transcript

Are you looking for your first internship or job or maybe the next step in your career? Welcome to Top of the Pile, the podcast that explores all things career for 20-somethings. I'm Karen Elders with Launch Career Strategies and I'll be your host. Let's get started. 

Okay, today's guest is Ann Garcia, a certified financial planner and managing partner of Independent Progressive Advisors, which is a financial advisory firm based in Portland, Oregon. And some of you might, listening, might recognize Ann's name because she was the guest on the last episode of Top of the Pile where Ann shared amazing advice and tips around financial planning and paying for college. But in this episode, we're focusing on sort of a financial 101 for young professionals. So things you can start to do now to set yourself up financially in the future. Ann started her own career path in tech but realized her passion for financial planning and shifted her career in that direction. So really excited in addition to being a CFP, she is an author. She recently wrote an amazing book on how to pay for college and she's been featured in the New York Times, US News and World Report and CNN and Money among many others. So welcome, Ann. 

Thank you for having me. 

When we talked, you have some real tactical advice on getting your finances in order for young people. Tips on credit cards, credit scores, how to set a budget. Can you get us started and speak to some of those things? 

Yeah, absolutely. So I like to think of your credit score as your adult GPA is a way to think of it. For young adults, it's one of the most important numbers out there. Parents who want to help their kids build credit can add their student, even as a high school student, as an authorized user on their credit card. It does not require you to give them a credit card but by adding them as an authorized user, your credit information gets reported to their credit file. So that can be a really nice gift for parents with good credit to give their kids. I know I did that for my kids and my daughter was able to get a credit card with a $6,000 per spending limit right out of college where I've heard lots of other kids struggle to get more than a $500 spending limit. So credit scores are a tool that people who give credit or institutions that give credit use to decide whether they think you're likely to pay the loan back or not. The higher your credit score, the lower your interest rate. So this is really important if you ever carry a balance on your credit card, which you shouldn't but which is a reality of life for a lot of young people. It's really important when you go to buy a home and qualify for a mortgage, you will pay a lower interest rate with a better credit score than without. The other thing, parents just looking at this selfishly, what's in it for you? Well if your student has some credit, oftentimes they will not need you to co-sign their utility contracts while they're a college student and that puts you on the hook for it as well or co-sign their apartment lease while they're a student or after they graduate. So there's benefits for parents as well. Credit scores, people are always surprised to hear they have nothing to do with your income. They have everything to do with how you use credit. So do you make payments on time? What percent of your available credit are you using? That's called your credit utilization ratio. And typically a good credit utilization ratio is one third or less. So what that means is if you have a $3,000 credit limit, the credit agencies for scoring purposes would like you to have a balance of no more than $1,000 at a time. So as you're starting out and using a credit card for the first time, that's sort of a good benchmark to keep in mind. Absolutely set up auto payments so that your payment gets made every month, but monitor your balance on an ongoing basis because it might benefit you to make mid-month payments to bring your balance down if you're buying large items, which is fairly typical of people just getting started out who might need a sofa for their apartment or a set of pots and pans or whatever that is. But having a good credit score is, like I said, it's like your adult GPA and it will save you hundreds of thousands of dollars over your lifetime in lower interest rates. And so it's really important that you pay your bills on time. Even utility bills get reported to credit agencies. It's important that you don't overextend yourself on credit. Keep your balances reasonable. 

Okay, let me jump in with a question. So does it get you a better score, for example, if person A has a credit limit of $1,000 and person B has a credit score of $5,000, does it help your score to have a bigger balance that you're paying off or is it just how you manage whatever credit limit that you have? 

It's how you manage what credit you do have. And keeping your balance within a third of your credit limit is sort of the golden ratio for credit utilization. It is not helpful. One of the most persistent myths out there about credit, it is not helpful to keep a balance on your card. Best practice is spend something on your card every month and pay it off in full every month. Carrying a balance does not help your credit score. Got it. That makes sense. But people believe that and deliberately don't pay off their credit card and they're paying 18-20% interest on their card, which is... Your credit card company is happy with you, but your credit score might not be. Okay, so that's credit score and we've talked about credit cards. Okay, obviously one big thing that is starting out is setting a budget and having spending awareness. Can you speak to that a little bit? Yeah, absolutely. I mean, I think one of the hardest things for students who transition from college to full-time employment, there's this tendency to think, oh my gosh, I'm going to be making $60,000 a year. That's $5,000 a month. How could I possibly spend all that money? Well, taxes are going to take a big chunk of it right out of the gate. So, you're not going to have that much on an ongoing basis. Even if you're in a low tax rate, you're still paying payroll taxes, which are 7% of your paycheck, plus your federal and state taxes. So don't assume that that whole amount of money is available to you every month. A good rule of thumb for housing is your housing costs should be less than a third of your pay, ideally less than that. And here's a pro tip. The more people you share your kitchen and bathroom with, the cheaper your housing is. So living by yourself is far more expensive than living with other people in almost every situation. And then when you look at your budget, a great target for people just starting out is that 5% of your money goes into retirement. If your company offers a plan and they offer a match, if you're not taking the match, you are basically declining a portion of your salary. So if your company has a 3% or 4% or 5% match, make sure that you are contributing 3, 4, or 5% of your salary to your 401k. And as a young person, if you can do the Roth 401k, which is where you pay taxes now, but you take the money out tax free later, that tends to be a huge advantage because you're in a lower tax right now than you will be at other points in your life. Not to mention that you can take Roth contributions back out, particularly of a Roth IRA. So if you need money for a down payment for a house or something like that, that's savings money that you can in a sense double dip on. Exactly. It's really part of your salary. It's extra money. So that's a huge point. 

These are great tips. So I hope everyone's taking notes and writing some of this down, but the efficiency and the value that you bring up in numbers is a great point. And also, we went through a phase where companies really weren't matching in 401k programs, and now I'm hearing they are. So that is free money. 

Another thing that I think is super important for young people to do is try to build up some liquid savings, an emergency savings account. So if you can target another 5% of your pay to a savings account when you're getting started, that's terrific, especially right now because interest rates are so high. So if you set up a high yield savings account like with Ally or Marcus or Barclays Online, those are all paying 4.5% interest. So your money is actually working in your favor when you do that, but that's the type of money that will help you not end up with credit card debt. So when your friend decides to get married in Hawaii, that's money that's available to pay for that trip or your car breaks down, that's money that you have available. Your number one tool in avoiding credit card debt is having some savings. 

Yeah, yeah. And if it's for savings, I mean $5 a week, month, whatever you can do, something that's forced in particular that you don't have to, you just kind of set and forget. I'm not sure what you think of the Acorns app, but that is something that rounds up all of your purchases. So you buy a coffee for $3.95 and it rounds up to $4 and that $0.05 gets put into a savings bucket essentially. And it's little by little you don't even notice. 

There's a great book that I gave to my kids. My kids just graduated from college, so I gave it to both of them and I give it to their friends and whatnot. I don't think I'm the weird mom who gives this weird book. It's Ramit Sethi's I Will Teach You to be Rich. And it just has a really great for a young person, a really great step by step. Here's how to get your finances set up and organized so that you can live the life that you want. It's kind of a goofy title, but his idea is your rich life is where you're able to be extravagant on the things that you care about. And the reason you're able to do that is that you're disciplined about all the other pieces of your life. 

Great, great. Love that. Okay. And I will definitely include that and all the other links to anything other resources that you've mentioned in the show notes. So on that note, is it worthwhile for a young professional, someone early in their career, to hire a financial planner? Is that even in their reach or worth it or is it easy enough to do on their own? What are your thoughts there? 

You know, the hard thing for young people with financial planners is financial planners fell into a couple of groups. One is fee only fiduciary advisors who are only paid for the advice that they give. They don't sell any products. And the other is all the people out there who sell stuff, you know, whether it's insurance agents who call themselves financial advisors or, you know, people who work for mutual fund companies who sell those funds, you know, all the commission based people on the fee only side, it's very hard to find someone who will for a reasonable sum of money, offer kids, you know, young adults financial advice, but you can check out, you know, XYPN is a great resource for that. And when people go to these commission based people, what they tend to end up with is being sold, you know, big life insurance policies, which is a waste of their money. One thing that I do for all my clients is I offer to meet with their kids. When they're either coming through college or getting close to graduation and whatnot, because as an advisor, I find the number one way that my clients financial plans go off the rails is that their kids finances go off the rails and they step into and they step into help. So I see that as part of my fiduciary obligation to, you know, my fiduciary duty to, to my clients is to help their kids be money smart. So if you as a parent work with a financial advisor who is a fee only fiduciary advisor, ask them if they will consult with, with, with your kid. If you're the young adults, ask your parents if they're financial advisor. Just ask. Exactly. 

So, okay. So you have your book and your online class. So tell us a little bit more about those so everyone can understand more. 

Well, so the book is really, I think a tool you could pick up at any age to help develop, an age appropriate financial plan that will get you through to college. The online course is really designed for parents of high school students who are in the later stages of that planning. And it helps you to just map out, you know, what's your budget, what's your admission strategy, where are you going to apply? How are you going to pay for it? How do you negotiate a financial aid award? And it includes all the parenting components. You know, how do you have these conversations with kids, with your kids? How, you know, what kind of, what kind of environments are beneficial for your kid? You know, what makes them successful, unsuccessful and, and, and how do you incorporate that into, into your college search so that, so that they find a school that's not just an academic fit, but also a social and financial fit. Because it's really the way you blow a lot of money on college is not graduating in four years. You know, in particular transferring because transfer students get less scholarships than, than do incoming, than do incoming freshmen. So it is definitely worth finding, you know, finding the right fit where your student is going to engage and thrive, not just academically, but also socially. Yeah. I mean, it's a major part of where parents' money and young professionals' money that are just entering into the workforce, where their money goes. Well, and you know, the fastest growing group of borrowers, of student loan borrowers is parents who are taking out Parent PLUS loans. And you know, if you're a parent in your late forties or your fifties and you're, you know, assuming 40, 50, $60,000 of debt for your, for your students' college, that's a debt burden you might be carrying into retirement, or that might be causing you to work an extra several years. That might be cutting into your ability to save in your prime earning and savings years. So that's really something, something to look out for. 

Yes, I mean, I personally had a student loan from college and I was, you know, newly married and found myself, you know, still paying off my loan. And my husband said to me, you know, do you realize how much interest you're paying on that? And, you know, I had been kind of going along and paying it off, being diligent, my little payments, but like, you know, not paying attention. And I made the decision to bite the bullet and use my savings to pay it off. 

I think that's the big point here, especially of what you do in your career as a financial planner is to avoid these big loans, student loans included, if possible. So you know, and get on the right track of spending and budgeting and being mindful of all of this and looking at big pictures and not just today as a young person, really, considering your future and what you might need to budget for and plan for. 

All right. Wow. Lots of good advice here. And thank you so much for being on today's episode. This was awesome. 

Oh, thank you for having me. 

Launch Career Strategies helps young professionals launch in a successful and fulfilling career path. Check us out at launchcareerstrategies.com. By the way, if you enjoyed this podcast, please leave a rating or review. Those are key to helping spread the word about top of the pile so it can reach other young professionals or anyone looking for advice on how to up their career gain. Thanks for listening. I hope you have and have it. Thanks for listening, I hope you have or are having a great week!